Headspace, tech's favorite meditation app, just raised $93M. The CEO reveals why he went with an unusual mix of backers and why the startup will have to pay back half of the round.

• Headspace, a startup that makes an app for guided meditation, has just raised $93 million in new funding.
• The deal's size isn't unusual, as outsized transactions known as "mega-rounds" become the new normal in tech. But the deal is noteworthy in other ways.
• Headspace's cofounder and chief executive officer Rich Pierson says it fielded "lots of term sheets" from potential investors, which gave the company the ability to craft the conditions of the round to their liking.
• His advice for founders: "I wouldn't be forced to take some of the checks and terms that people are offering in this kind of cycle," Pierson said.
• Visit Business Insider's homepage for more stories.

The mega-round isn't going anywhere, as startups wait longer to raise outside capital and investors stockpile funds for backing the most mature companies.

Headspace, a startup that makes an app for guided meditation, is one of the latest beneficiaries of the capital blitz. The company that waited five years to raise its first significant round of financing in 2015 has just closed on $93 million in new funding. The Series C round is only a few million dollars short of being a mega-round, the term du jour for the industry, which describes a financing event where a company pulls in at least $100 million.

The cash injection will allow the Southern California startup to pour gasoline on its newer enterprise business, which sells app subscriptions to corporations as an employee benefit. Headspace for Work has doubled revenue two years in a row, according to a company statement.

The deal's size isn't unusual. Last year, the tech industry recorded 257 mega-rounds, an increase of almost 12% from 2018, according to PitchBook data.

However, the Headspace round is remarkable in the details.

Rich Pierson, cofounder and chief executive officer of Headspace, said the company fielded "lots of term sheets" from investors. The interest meant that the two founders could craft the conditions of the round to their liking.

They structured the deal in a way that it would not dilute shares of the company more than was necessary. And they selected a lead investor that offered terms that put the company's best interests ahead of their own, according to Pierson.

His advice for founders: "I wouldn't be forced to take some of the checks and terms that people are offering in this kind of cycle," Pierson told Business Insider.

Headspace has to pay back nearly half of the new funding

The new funding has an almost even mix of equity and debt financing, which the company will have to pay back with interest. It includes $40 million of debt financing from Pacific Western Bank.

The main reason a startup would want to raise debt financing is because it doesn't create new chunks of ownership. That means the value of the equity held by existing shareholders remains the same.

Typically, a startup takes on debt when it expects to make enough money to settle up. Headspace's consumer business, which sells subscriptions to the app, is profitable, according to the company.

That wasn't always the case. Headspace began in 2010 as a meditation events company backed by a family-and-friends round of financing. The business model was "terrible," Pierson said, and two years later, the startup reinvented itself as an app - with a business model baked in. The app requires a subscription to access that costs $12.99 a month or $70 for the year.

The latest round also includes $53 million in venture capital, which Headspace can spend to grow the parts of the business that are less predictable, like Headspace for Work. Pierson said hiring a larger staff is among the startup's biggest expenses.

Headspace could also use the capital to provide funding for clinical trials that study the effects of its app on a number of health conditions. If it gets approval from the Federal Drug Administration, the app could be prescribed by a doctor and paid for a health insurer. Healthcare opens a huge market opportunity for Headspace.

But the success of its healthcare business relies on an approval it doesn't have yet.

"We are at the mercy of the research results that come back," Pierson said.

The equity financing comes from some lesser-known investors

The founders could have their pick of investors if the round was as competitive as Pierson said. They went with a mix of sector-specific funds and lesser-known firms that invest at the growth stage.

The round includes several venture capital firms that were founded by media moguls, including Shari Redstone's Advancit Capital and Peter Chernin's fund. Times Bridge, an investment vehicle affiliated with the largest media conglomerate in India, also participated.

Pierson said he and his cofounder, Andy Puddicombe, got to know their investors before signing term sheets to make sure they shared their values around "selfless drive," personal growth, and courage.

"The thing that sometimes people forget is that when you take an investment, it's harder to get out of than a marriage. You are in that thing," Pierson said.

As part of the process, they learned that Rishi Jaitly, the chief executive of Times Bridge, lost his brother to depression and addiction. He felt compelled to invest because of the benefits of meditation.

For a lead investor, the founders picked Blisce, a venture capital firm that writes checks into late-stage startups. They first got to know Alexandre Mars, one of the firm's partners, in a conversation about his foundation, Epic. It raises donations for a portfolio of organizations fighting social injustices experienced by children.

"They were people we wanted to spend time with," Pierson said of the two Blisce partners. The firm also gives 20% of its returns back to the foundation, according to its website.

The firm also stood out because of an offer it made: Blisce would surrender a board seat so the company could add a director who brings operating experience in the healthcare sector. A board seat is the typical remittance for an investment in a company of this stage, which made the firm's offer even more meaningful.

"That tells you a thing about them," Pierson said.

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